Editor’s Note: The authors of this Leader Board will present Chapman University’s semiannual economic forecast, which has ranked No. 1 for economic forecasting. The event is scheduled to start at 3 p.m. on Dec. 14 at Chapman’s Musco Center for the Arts.
California’s population is on a downward trend, as officially acknowledged by the state’s Department of Finance (DOF) that has sharply reduced its forecast.
As shown in Chart 1, the DOF now projects California’s population at 39.4 million in 2030 instead of its earlier projection of 41.9 million. That represents 2.5 million fewer people, or roughly the current population of Chicago.
What happened?
The answer to that question is fairly clear. In its original projection, the DOF forecasted that California’s population would increase from 39.5 million in 2019 to 40.1 million only three years later in 2022. Now, it’s projecting 39.0 million in 2022, a sharp downward revision of 1.1 million from its original estimates (see Chart 1).
That’s approximately equal to the net number of people who’ve left California for other states between 2019 and 2022. See Chart 2.
While the state’s bureaucracy is finally taking into account the increasing outflow of people leaving the state, it remains to be seen if politicians in power will keep their outdated goals.
Although the implications of this sharp downward revision in California’s population are many and varied, we’ll focus this Leader Board on the impact to housing demand through 2030.
That impact can be estimated in the following way. California’s population gain from 2022 to 2030, as revised by the DOF, points to an increase of 402,000 (from 39,028,000 in 2022 to 39,430,000 in 2030). Whether this increase will occur remains to be seen because it’s going against the current trend of four straight years of outflows in population: see Chart 2.
If the current ratio of population to housing units in California of 2.67 people remains constant through 2030, housing demand will increase by 150,000 units (402,000 divided by 2.67).
But that’s the total over the eight-year period between 2022 to 2030. On an annual basis, the average annual increase in demand would be about 19,000 units (150,000 divided by 8).
The DOF in 2019 originally projected an increase of 1,714,000 in population (from 40,146,000 in 2022 to 41,860,000 in 2030). At the assumed constant ratio of 2.67 people per housing unit, that points to an increase of 642,000 housing units (1,714,000 divided by 2.67) or an average annual demand of 80,000 units over eight years between 2022 and 2030 (642,000 divided by 8).
The widespread difference in housing demand between 80,000 units versus 19,000 units points to the significance of the DOF’s sharp downward revision in the state’s population growth.
Chart 3 shows these two widely divergent housing demand projections. Under the old population projection, annual average housing demand is expected to decline to 80,000 units, a level not seen since 2014.
But the new population estimates point to an even more dire forecast of only 19,000 units per year. That average rate of 19,000 compares to an average of 112,000 permits issued every year between 2019-23.
It gets worse. Chart 3 does not take into account the impact of net domestic migration on the stock of existing housing. When people leave a state, they also leave their homes behind. We don’t have data on whether they vacated a rental home or a home they owned.
In any case, the additional number of existing housing units that are now available for those left behind will be significant.
At an average number of people per California housing unit in 2022 of 2.67 people, the net outflow of 1.2 million between 2019 and 2022 is equivalent to increasing California’s supply of housing by 450,000. That’s roughly equal to the total number of new residential permits issued in California over the last four years.
Homebuilders should take notice. Unless the state begins to do the things necessary to make California a more attractive place to live and work, the net population outflow will continue. If that happens, housing demand will continue to decrease while the supply of vacated residential units (homes and apartments) increases.
Such shifts in supply and demand will eventually result in a steep decline in residential construction activity.
Whatever that decline turns out to be, one thing is abundantly clear. Yearly permit activity through 2030 will stand in sharp contrast to the 500,000 homes—later revised to 300,000—that Gov. Gavin Newsom argued the state would need.
In light of the DOF’s new population projections and the analysis presented in this article, Newsom’s much-ballyhooed “Marshall Plan” for housing is ludicrous in the extreme.
Yet, that plan continues to serve as the basis for Sacramento’s draconian public housing mandates that have been foisted on local municipalities. The state’s own DOF’s population revisions show that these ham-fisted statewide mandates not only have no empirical basis but undermine what up to now has been the purview of local communities.
Ironically, Newsom is getting what he originally wanted—a drop in California’s population-to-housing ratio.
Sadly, it’s happening not because the denominator in that ratio—housing—is increasing but because the numerator—population—is decreasing.
